Ukraine's gas industry: Rent-seeking and corruption

Sep 19, 2000 02:00 AM

by Heiko Pleines

>From 1992 until 1995, Ukraine's gas imports were managed solely by the state. When Russian-Ukrainian energy trade
was reorganised in 1995, it was agreed that private intermediaries in Ukraine would be responsible for most energy
imports. Nevertheless, the state kept control over gas imports by setting annual import quotas for all traders. In
addition, the state also regulated domestic sales by granting regional monopolies to different gas traders.
Under the new regulation three main private gas importers and traders emerged in Ukraine: United Energy Systems of
Ukraine (UESU -- or in Ukrainian, Yedini Energetichni Systemy Ukrayiny), Interhaz and Itera-Ukraina. The state
company Ukrhazprom continued to manage the sale of those gas imports from Russia, which were provided as payment for
Gazprom's use of transit pipelines through Ukraine.
Considering the bad payment behaviour of Ukrainian gas consumers, which led to arrears for gas deliveries estimated
at about $ 1 bn as ofthe end of 1999, the country's domestic gas market does not look very attractive for private
businesses. Nevertheless, private gas importers were able to make immense profits by simply paying even less to gas
producers in Russia and Turkmenistan than they received from their Ukrainian clients.
However, they could realise these profits only with the help of state support. The government had to grant them an
import quota and assign them to relatively solvent customers. In addition the state had to ensure that gas producers
-- first of all, Russia's Gazprom -- could not collect their debts from Ukrainian importers. The result of this
situation was that a network of corruption was established between state officials and gas traders.

The amount of money involved has been highlighted by the Lazarenko affair. According to a report by the Financial
Times, Pavlo Lazarenko, who was Ukraine's prime minister in 1996-97, received at least $ 72 mm in bribe money from
gas importer UESU. In return, Lazarenko helped UESU to become one of Ukraine's leading companies with an annual
turnover of $ 10 bn.
When Lazarenko was sacked as prime minister, his successor Valery Pustovoitenko started a comprehensive investigation
into the business of UESU, which led to the first accusations. In December of 1998, Lazarenko was arrested in
Switzerland on charges of money laundering. He fled to the United States, where he was again arrested and charged
with the laundering of $ 114 mm received as bribe money during his time in office.
This June, while still being held in the United States, Lazarenko was sentenced for money laundering in Switzerland.
Yuliya Tymoshenko, who was president of UESU when Lazarenko was prime minister, has so far avoided criminal
prosecution. In 1997, she left the company and went into politics.
In December of 1999, she became a deputy prime minister with special responsibility for energy matters. Her husband,
who still is a member of the board of UESU, was arrested last month on charges of embezzlement of state property.

However, the private gas business has lost its attractiveness since Ukraine started another serious program of reform
for the domestic gas market with the foundation of the national oil and gas company Naftogaz Ukrayiny in the summer
of 1999. By tightening market regulation and by monitoring financial flows, the state increased control over the
domestic gas market and reduced the market share of private gas traders.
Naftogaz Ukrayiny then received a monopoly on gas deliveries to state organisations and private households. As a
result, the company's market share is expected to reach 85 %. However, the dominance of a single state company alone
does not guarantee the end of corruption in Ukraine's domestic gas market. It might be telling that the state
accounting chamber is not allowed to check the company's accounts.

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